OREANDA-NEWS. December 14, 2011. Mukesh Ambani's Reliance Industries Ltd (RIL) has accused the oil ministry of moving goal posts mid way on pricing and utilisation of gas extracted from coal seams - called coal bed methane (CBM) in industry parlance - and said the move was against the government's own decision and violated terms of the contract with the state.

In a letter to DGH, the oil ministry's regulatory arm for explorers, RIL said fresh guidelines circulated recently adversely affected the company's contractual rights and amount to unilaterally attempt to amend the contracts. "These unilateral changes proposed by the government adversely and materially impact our financial interests and the very basis of investment made so far under the contracts," RIL said in letter.

Reliance has two CBM blocks - Sohagpur West and East straddlingMadhya Pradesh and Chattisgarh. It recently served an arbitration notice on the government after it became known that the ministry was considering the option to reclaim part of the investment - some estimates pegegd it at USD 1.8 billion - recouped by the company from sale of gas pumped from its Andhra offshore field. The ministry was considering the option as a punishment for 30% fall in output from the field, even though there was no such provision in the acreage auction policy or the contract with the state.

RIL has blamed geological factors for output dropping to 34 mcmd (million cubic metres per day) against the targeted 61 mcmd. In case of CBM, RIL said the policy was approved by the Cabinet in 1997. The fresh guidelines, it said, were at variance and violated the terms in the government's notice inviting tenders for awarding CBM acreage as well as the company's contract with the state.

RIL has mainly objected to the condition in the guideline restricting competition for discovering the fuel's market price to a limited number of coal bed gas users identified by the government. This will not allow discovery of a competitive arms-length pricing and goes against the terms of the contract.

"While the government may wish to facilitate supply of gas to some sectors, the approval powers of the government cannot be used to suppress prices of CBM gas below what the market can fetch by restricting price discovery itself . Use of its powers of approval (of the basis/formula of pricing) cannot be used by the government to facilitate the administration of subsidies through preferential pricing to chosen sectors," RIL said.

For good measure, the company said that it has "no objection to sell to any customer (priority or others), provided they are willing to pay market prices discovered by the contractor as required by the contract. RIL said, "CBM blocks take years to build up and considering the small quantities of gas, it is not possible to supply the gas to the medium and large customers... "